An econometric analysis of the Austrian business cycle with reference to South Africa

Volume 1, Number 1

An econometric analysis of the Austrian business cycle with reference to South Africa

Farai, N. and le Roux, P.

The Austrian Theory of the Business Cycle (ABCT) proposes that the roots of the current global financial crises – and recessions in general – are to be found in the actions of central banks through credit expansion and manipulation of interest rates. ABCT argues that central banks manipulate interest rates causing them to fall below the natural level leading to credit expansion and malinvestments.

The purpose of the article is to provide an explanation of how monetary policy (via setting artificial interest rates) causes longer term investments at the expense of shorter term investments. Granger causality testing and a Vector Error Correction Model (VECM) are used in the econometric analysis. The findings provide empirical evidence of ABCT in explaining fluctuations in South African economic activity. Policy prescriptions relating to the central bank are given.